The Business Case for Gender Diversity

Does gender composition of a company’s leadership team affect its financial performance?
McKinsey & Company’s Delivering Through Diversity (2018) report chronicles the global relevance of the correlation between diversity in the leadership and stronger financial performance of large companies. Diversity in this study is defined as having a greater proportion of women and ethnically/culturally diverse individuals in the executive team. Released earlier this year, the study expands its 2015 research, Why Diversity Matters, a widely cited work that influenced inclusion and diversity transformation initiatives across all sectors of society. Covering more than 1,000 companies across 12 countries, the 2018 study measured not just profitability this time, but also longer-term value creation.
Below are some significant findings of the updated study:

• Gender diversity and business performance showed even greater correlation. Companies in the top-quartile for gender diversity on their executive teams had a 21% (vs. 15% in 2015) likelihood of outperforming their fourth-quartile industry peers on earnings before tax margin. Moreover, this study posted a 27% likelihood of outperforming fourth-quartile peers on longer-term value creation, as measured by economic profit margin.
• Having gender diversity on executive teams is positively correlated with higher profitability across geographies in the study, highlighting the role that executive teams (where the bulk of strategic and operational decisions are made) play in the financial performance of a company. Also worth noting is that the highest-performing companies on both profitability and diversity had more women in revenue-generating roles than in support roles on their executive teams.
• Gender diversity is just the tip of the iceberg. Executive team cultural diversity shows an even higher correlation with profitability. Companies in the top-quartile for cultural diversity on executive teams were 33% more likely to have industry-leading profitability. This would suggest that inclusion of diverse members, expanded beyond gender and cultural diversity, can be a key differentiator among companies.
• Opting out of diversity has a price. Overall, companies in the bottom quartile for both gender and cultural diversity were 29% less likely to achieve above-average profitability than were all other companies in the data set. Not only were they not leading; these companies were actually behind the curve!
The study is quick to point out that the correlation relationship is NOT causal, meaning that greater gender and cultural diversity in corporate leadership DOES NOT automatically translate into more profit. Rather, it indicates that companies that have diverse leadership are more successful than those that opt out of executive team diversity.
The success of a more diversified leadership team may be attributed to the fact that these companies are sourcing from a bigger and deeper pool of top talent who contribute to expanded customer orientation, better employee satisfaction, and more balanced decision making, all of which eventually make their path toward increasing returns. This success opens up the possibility that other forms of diversity (age, sexual orientation, experience, background, and mind-set) are also likely to contribute to some level of competitive advantage for the team that can source and retain such diverse talent.
So, there is a business case for gender and cultural diversity that goes beyond town hall jargon and actually ties to the much sought-after bottom line! Now the relevant question is: how diverse is YOUR executive team?
 
Maria Rosario N. Balagot is a Strategic Management Lecturer from the Management and Organization Department of the Ramon V. Del Rosario College of Business of De La Salle University. She is Head of Corporate Planning of Alstra, a Concepcion Industries company, and has spent over 30 years across multinational and local companies in the banking and financial services industry.
marionbalagot@gmail.com